In a decisive move to stabilise the Indian currency, the Reserve Bank of India has tightened regulations in the foreign exchange (forex) market by prohibiting banks from offering rupee non-deliverable forward (NDF) contracts to both resident and non-resident corporate clients.
The step aims to reduce speculative trading and curb excessive volatility in the rupee, which has been under pressure in recent weeks.
Why Did RBI Take This Step?
The action comes amid sharp fluctuations in the Indian rupee, which recently:
- Breached the ₹95 per US dollar mark intraday
- Forced RBI intervention to bring it back below ₹94
- Declined over 4% in March 2026
- Emerged as one of the worst-performing Asian currencies in FY26
The volatility has been driven by global uncertainties, including geopolitical tensions and rising oil prices.
What Are NDF Contracts?
Non-Deliverable Forward (NDF) contracts are derivative instruments where:
- No actual delivery of currency takes place
- Settlement happens in foreign currency (usually US dollars)
- They are often traded in offshore markets
These contracts are widely used for hedging, but they can also be misused for speculative trading and arbitrage.
Key Measures Announced by RBI
The RBI’s latest notification introduces several important restrictions:
1. Ban on NDF Contracts
- Banks (Authorised Dealers) cannot offer NDF contracts involving INR
- Applies to both resident and non-resident clients
2. Focus on Deliverable Contracts
- Banks can continue offering deliverable forex derivatives
- Only for genuine hedging purposes
- Clients must not hold offsetting positions in offshore markets
3. Restrictions on Rebooking
- Rebooking of cancelled forex derivative contracts is not allowed
- Applies to both deliverable and non-deliverable contracts after April 1
4. No Deals with Related Parties
- Banks are barred from entering forex derivative contracts with related parties
5. Documentation Requirement
- Banks must collect necessary declarations and documents
- To ensure compliance and prevent misuse
Earlier RBI Action
Before this move, the RBI had already:
- Capped banks’ daily net open positions in the onshore market at $100 million
- Set implementation deadline as April 10, 2026
However, banks reportedly shifted exposure to corporates, prompting further tightening.
Market Impact
Currency experts believe the new rules will:
- Reduce speculative arbitrage trades
- Force banks to sell dollars, supporting the rupee
- Align forex activity with real economic needs rather than speculation
The move also closes a key loophole where traders used contract cancellation and rebooking to roll over speculative positions.
Conclusion
The RBI’s latest measures send a strong signal that the forex market should primarily serve hedging and genuine business needs, not speculative gains. By tightening oversight and limiting risky practices, the central bank aims to restore stability in the rupee and strengthen investor confidence.